Taxing the sale of marijuana

Dealing with creditors is never a fun experience. However, some creditors are more severe than others, especially in the cannabis industry. One of those is the California Department of Tax and Fee Administration (CDTFA), which administers California’s sales and use, fuel, tobacco, alcohol, and cannabis taxes, as well as a variety of other taxes and fees that fund specific state programs. It’s no secret that CDTFA cannabis taxes are crippling the California cannabis industry. For example, I recently recorded a Cannabis Law Now podcast episode with Anthony Almaz, general counsel for Catalyst. Catalyst is challenging various emergency rules promulgated and adopted by CDTFA that would further expand taxable items in California’s cannabis industry. This post though is about the CDTFA cannabis creditor relationship and the myths and truths around it.

You Can Negotiate and Settle Your Cannabis Debt

Not really. CDTFA maintains a settlement program for sales and use tax, yes. However, per CDTFA’s website, “The settlement program is available to taxpayers or feepayers who have a petition for redetermination, administrative protest or claim for refund pending in connection with a tax or fee liability administered by CDTFA.” Basic translation is that you can’t even get into settlement discussions with the CDTFA unless, essentially, there’s a dispute, protest, or refund claim with CDTFA over what’s owed. If CDTFA got the math and deadlines right on your cannabis sales and excise taxes, there’s no clear path to negotiate and settle that specific number through the settlement program unless, for instance, you want to pay the taxes owed and appeal the assessment. Further, CDTFA also has an “Offer in Compromise” (OIC) program that allows a tax debtor to pay less than what’s owed so long as CDTFA determines that the tax debtor doesn’t “have, and will not have in the foreseeable future, the income, assets, or means to pay their tax liability in full.” Sounds great, but only certain tax debtors qualify here, too. To secure an OIC, the tax debtor:

  • must have a final tax or fee liability on a closed account.
  • must no longer be associated with the business that incurred the liability or a similar type of business.
  • does not dispute the amount of tax or fee owed.
  • cannot pay the full amount owed in a reasonable amount of time.

Additionally, until January 1, 2028, CDTFA will consider an OIC for open and active businesses that did not collect sales tax reimbursement or use tax; successors of businesses that may have inherited tax liabilities from their predecessors; and consumers, who are not required to hold a seller’s permit, but incurred a use tax liability.

As an active cannabis business, unless you can meet specific criteria, If you have any ability to pay the debt in a reasonable amount of time as determined by CDTFA, the OIC program likely isn’t going to work for you on your CDTFA cannabis debt.

Your Cannabis Debt Goes Away with Insolvency Alternatives

Generally untrue in California. We’ve written before about how cannabis companies cannot currently access bankruptcy courts on the whole due to current federal illegality. Turning to insolvency alternatives, like assignments for the benefit of creditors (ABCs) and receiverships, is the only way to navigate serious financial failure in the cannabis industry as a result. What happens to your CDTFA cannabis debt though in the context of some of these insolvency alternatives?

In California, state tax obligations continue to persist in ABCs, which includes the principal amount, as well as any interest or penalties that have accrued. These obligations are not discharged, and the state maintains a preference until everything is paid in full, even if the interest and penalties accrued after the assignment. Similarly, state tax debt does not automatically go away in the event of a receivership, and such debt is typically entitled to high priority in payment. However, under California law, this tax liability could potentially be mitigated if the business operation is discontinued during the receivership. Lastly, tax collection can be halted (but the debt will be not eliminated) where certain debtor assets may be subject to an automatic stay in state court.

CDTFA Cannabis Plan Payment Plans are Negotiable

Sort of but not really. It really only depends on what you can pay based on financial fitness as determined by CDTFA. If a cannabis company cannot timely pay CDTFA taxes when owed, the CDTFA will likely enter into a payment plan with the company if the company is eligible under certain CDTFA criteria. If the amount owed (plus interest) can be paid in 12 months or less, the CDTFA will usually automatically approve the plan. In the event a payment plan will last more than 12 months, the CDTFA will commence an in-depth review of the current finances of the company and its ability to pay over time. That includes an individual financial statement for the company, bank statements, income tax returns, A/R, balance sheets, and cash flow statements, among other items. And every 6 months after the execution of a payment plan lasting more than a year, the CDTFA will conduct a financial audit of the company to determine its ability to continue to pay for the life of the payment plan. And if there are any events that occur that could cause the company to either pay more per month or to pay the balance owed sooner, the CDTFA demands that those events be reported and will unilaterally adjust the plan.

The taxpayer can terminate the plan at any time and the CDTFA can terminate the plan for non-payment. Failure to pay will lead to notices from CDTFA which, if ignored, will lead to termination of the plan, and the CDTFA will then commence collection proceedings by filing liens and executing on levys and garnishments on and of company assets. All in all, once a payment plan is accepted, especially for active businesses, the CDTFA is mostly inflexible on payment plans (and the agency will not usually negotiate the amount of the tax owed unless there was an accounting error on their end, which is the taxpayer’s burden to prove).

You Don’t Have Personal Liability for your CDTFA Cannabis Debt

Unfortunately, false. State law dictates that personal liability for CDTFA cannabis debt is triggered if there are unpaid CDTFA taxes and the taxpayer entity is terminated, dissolved, or abandoned and the responsible person(s) in control willfully failed to pay (or cause to be paid) those taxes. If that occurs, the CDTFA will send a deficiency notice to the “responsible person(s)” either (1) 3 years after the last day of the calendar month following the quarterly period in which the CDTFA obtains actual knowledge of the termination, dissolution, or abandonment of the business of the corporation, partnership, limited partnership, limited liability partnership, or limited liability company, or (2) 8 years after the last day of the calendar month following the quarterly period in which the corporation, partnership, limited partnership, limited liability partnership, or limited liability company business was terminated, dissolved, or abandoned, whichever is earlier.

“Responsible person” means any officer, member, manager, partner, or other person “having control or supervision of, or who is charged with the responsibility for the filing of returns or the payment of tax for, or who is under a duty to act for the corporation, partnership, limited partnership, limited liability partnership, or limited liability company”. “Willfully fails to pay or to cause to be paid” means that the failure was the result of an intentional, conscious, and voluntary course of action. Importantly, the responsible person is liable only for taxes (and interest and penalties) that became due during the period they had control, supervision, responsibility, or a duty to act for the corporation, partnership, limited partnership, limited liability partnership, or limited liability company. For example, if the current directors and officers of cannabis company resign prior to an ABC or receivership (and the company thereafter is terminated, dissolved, or abandoned), those directors and officers will be personal liable for unpaid CDTFA taxes that accrued during the time period they had “control, supervision, responsibility, or duty to act” for the company (that they willfully failed to pay) and not any time before or after that specified period of control/responsibility/supervision.

You will Receive Forgiveness of Your Penalties

It’s possible, but not guaranteed. Once a cannabis company pays off the principal tax and interest owed, it can request a waiver from CDTFA of accrued penalties. The CDTFA is allowed to cancel mandatory penalties when taxpayers fail to pay taxes or file a return “for a good reason and because of circumstances beyond his or her control”. However, the taxpayer must still be able to prove that he or she exercised diligence and did not simply neglect tax obligations.

Past acceptable “good reason” and “circumstances beyond the taxpayer’s control” include “the occurrence of an emergency as defined in section 8558 of the Government Code, a natural disaster or other catastrophe directly affecting the business operations of the person, or a single failure to make a timely remittance over a three-year period or during the period in which the person was engaged in business, whichever time period is shorter; sudden hospitalization, an earthquake or other natural disaster that disrupts mail and electronic delivery systems, or fraud or other wrongdoing by a third party creating uncertainty about property ownership and tax liability”. There is also case law on the books holding that a general inability to pay penalties due to tough economic circumstances or the inability to generate revenue doesn’t suffice for waiver. The request form for penalty relief can be found here.

Little to No Mercy

Just because the cannabis economy is on the rocks in California does not at all mean that CDTFA will somehow take pity on cannabis companies that owe taxes. Business will proceed as usual regarding determination and collection, payment plans, personal liability, and penalty waivers. So, prepare yourself now if you find yourself on the end of CDTFA cannabis tax debt notice–there won’t be special treatment for cannabis companies on the horizon.

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Photo of Hilary Bricken Hilary Bricken

With a passion for organizational growth, Hilary advises clients in the cannabis, healthcare, and life sciences spaces on transactions, regulatory compliance, governance matters, and other corporate needs.

Hilary likes being a dealmaker: she values building collegial relationships with clients and other attorneys, and

With a passion for organizational growth, Hilary advises clients in the cannabis, healthcare, and life sciences spaces on transactions, regulatory compliance, governance matters, and other corporate needs.

Hilary likes being a dealmaker: she values building collegial relationships with clients and other attorneys, and she loves helping clients create value and business opportunities. She also appreciates the in-depth strategies that transactions rely on.

Much of Hilary’s practice is devoted to mergers, acquisitions, and other transactions, as well as to serving as first point of outside counsel for certain clients. She also assists with entity formation and the drafting of various governance documents and asset portfolio management. In addition, Hilary advises clients on industry-specific regulatory compliance.

Hilary’s experience with the cannabis industry dates to 2010, when she began assisting medical cannabis providers with business questions. It was immediately clear to her that this emerging, growing industry had a massive need for corporate counsel, and she has advised cannabis clients—including many major national and international companies—ever since. Her experience includes cannabis licensing; marijuana and industrial hemp regulatory compliance; mergers and acquisitions; corporate and transactional matters, including negotiating management services agreements, fee slotting agreements, cultivation supply agreements, and intellectual property licensing agreements; receiverships; dissolution and wind downs; and financing and debt restructuring. In 2023, Hilary joined Husch Blackwell out of enthusiasm for the firm’s deep bench of innovators in the cannabis and healthcare space.

Hilary also devotes a significant portion of her practice to healthcare clients, including physicians, physician groups, and medical services organizations, and she represents clients regarding the off-label application of controlled substances.

Known for offering a commonsense business approach to legal questions, Hilary never gives legal advice in a vacuum. She provides clients with definitive guidance that has practical applications, adding value and supporting business goals.